Friday, August 15, 2008

America The Uncompetitive

TAX FOUNDATION -- Amid rising concerns about the state of the U.S. economy, new data compiled by economists at the OECD shows that for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50% higher than the OECD average (see chart above showing US tax rate of 39.3% vs. 26.2% for non-US OECD).

The U.S. continues to have the second-highest combined federal-state corporate tax rate among industrialized countries at 39.3%. Only Japan has a higher overall corporate tax rate at 39.5%. By contrast, the average corporate tax rate among OECD countries has fallen a full percentage point in the past year, from 27.6% to 26.6%. Ireland's 12.5% corporate tax rate remains the lowest among OECD nations.

The release of these two OECD studies could not have come at a better time for the current political debate over how to move the U.S. economy forward. A U.S. corporate tax rate 50 percent higher than the OECD average should be a wake-up call to Washington, especially when combined with the empirical evidence that corporate taxes are the most harmful tax on economic growth. The question remains for the presidential candidates, What is your plan to restore American competitiveness?

The WSJ has a related editorial today, which concludes that "Every month that goes by without tax reform, America is a relatively less attractive place to do business. Over the past 18 months, nine of the 30 most developed nations and 20 countries world-wide -- from Israel to Germany to Turkey -- have cut their corporate tax rates. Nations are slashing rates to attract capital and jobs from the U.S., and the tragedy is that our politicians keep making it easy for them." MP: Below is a Tax Foundation chart (click to enlarge) showing how the McCain and Obama tax plans compare to each other, and to the current tax law. Note that McCain would cut the corporate tax to 25% while Obama would leave it at 35%.

15 Comments:

With a slump in the housing market, a credit crisis rocking the financial sector, the economy hovering on the edge of recession, rising inflation and unemployment, how can anyone seriously suggest more taxes? Is it audacity or pure idiosy?

The biggest Obama myth is not that he's a Muslim. It's that he'll cut taxes for everyone outside the top 2%. The media was up in arms to make sure everyone knew he wasn't a Muslim - why aren't they doing the same to let everyone know he wants to jack up taxes?

The effective US corporate tax rate is already at 24%, or lower than the other countries statutory rates.

Do you have any idea what the effective tax rate is in any other countries?

You are adding crabs and apples to get crap apples.

Moreover, the US effective rate has fallen from 35% in 2000.

So for all practical purposes the proposal you are making has already been implemented over the last few years and we did not get the benefits you claim your proposal would generate.

In 2000 when the effective corporate tax rate was 35% capital spending was 13% of gdp. This year when the effective corporate tax rate is 24% business fixed investment is 10% of gdp. So the data over the past few years shows that the exact opposite of your theory has actually occurred.

what is more important is the marginal rate of taxation, because investment decisions are made on a marginal cost, marginal benifit analysis. What brings down the effective rate is a bunch of deductions and credits, but a corporation gets those credits whether they make x profit or 2x profit. But when a company decides whther of not it will say build another plant in the US or in China, it has to take the marginal rate into consideration, which is what it will have to pay for producing one more unit of production. That is why the tax is particuarly damaging. Even if any drop in the marginal rate was accompanied by removals of credits and deductions so that the effctive rate remained the same, we would experience signifigant economic benifit.

not to mention most of those credits and deductions are not evenly distributed across industries and aremostly reserved for various firms and sectors that have lobbying power and certain political favor.

The angry SOCIALIST says: "The effective US corporate tax rate is already at 24%, or lower than the other countries statutory rates...Do you have any idea what the effective tax rate is in any other countries?"...

Does it matter what other countries do? Who's fault is it that citizens in other countries allow their governments to steal from them?

I want to see the math. Since the US corporate tax structure is steeply progressive, and flat from the first dollar above $335k in annual profit, the "effective" rate cannot be less than the statutory rate unless you put certain deductions (bad debt is mentioned in the text) back into the "profit" category. Any time you're using a definition of profit that's different than the IRS definition of profit, you're lying when you then proceed to claim your personal definition of "profit" doesn't match tax receipts.

Does the commerce department use only public companies for its tax and profit data? Another confounding datum is that public companies must report profit according to GAAP, which can be significantly different than how profit is reported per the IRS.

If "effective < statutory" is really just a claim that actual tax receipts don't match the marginal rate, that's not only a "no duh" conclusion it's the natural result in all steeply progressive tax systems.